a. You expect an RFR of 10 percent and the market return (RM) of 14 percent. Compute the expected return for the following stocks, and plot them on an SML graph. |
Stock | Beta | E(Ri) |
U | 0.85 | |
N | 1.25 | |
D | -0.2 |
b. You ask a stockbroker what the firm's research department expects for these three stocks. The broker responds with the following information: |
Stock | Current Price | Expected Price | Expected Dividend | |
U | 22 | 24 | 0.75 | |
N | 48 | 51 | 2 | |
D | 37 | 40 | 1.25 |
Plot your estimated returns on the graph from part (a) and indicate what actions you would take with regard to these stocks. Explain your decisions. |
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